What are the critical skills of supply chain leaders? This is a question we have been asked numerous times by CEOs searching for the right person to lead their supply chain strategies.

The following are five critical skills that we have observed supply chain leaders exhibit.

First, supply chain leaders surround themselves with the best and brightest supply-chain professionals. The supply chain leader of one textile manufacturer pushes the best-and-brightest idea all the way down to entry-level hiring: "Supply chain management philosophy so permeates our organization that ... if we can just get quality supply chain management MBAs to join our company, they'll move quickly through the decision-making hierarchy and never be tempted to leave us." This company regularly recruits at major supply chain-management schools -- most productively during recessions, when other companies cut back on hiring and top talent can be had more easily.
Second, supply chain leaders are metrics driven. Specifying goals for future improvement requires knowing where you presently are. Supply chain leaders should be able to list and explain the factors affecting availability, working capital, and cost, and push the organization to do supply chain benchmarking and best-practice analysis, and personally review the results. Unfortunately, many firms only measure what is easy to measure.For instance, they do not know the true total system cost of the SKUs they carry or take the trouble to measure the true cost of obsolete inventory, or put inventory carrying cost on internal financial statements.
Third, supply chain leaders, armed with the appropriate metrics, reward performance toward appropriate goals. These leaders establish reward and incentive programs to encourage people to behave in ways that benefit the overall firm -- not just their own functions. At one retail business, the purchasing, logistics, and merchandising managers work in cross-functional teams and are measured and rewarded on the basis of supply chain metrics that assess purchasing costs, logistics costs to get the product to the store (also called "landed cost"), and the selling price in the store. Not surprisingly, these cross-functional teams drive supply chain performance to achieve their bonuses.
Fourth, software, process, and technology advances are rapidly emerging to support sophisticated supply chain management. Supply chain leaders understand these new technologies and challenge the business case for technology adoption. These leaders lead the change-management process, helping drive user buy-in and making certain that proper vendor support, adequate training, and other resources are in place. Moreover, leaders who fully appreciate the challenges of deploying complex and costly systems help their companies avoid classic mis-steps. The CEO of an industrial equipment manufacturer admitted that her company had run afoul of one such pitfall: "We spent $18 million getting an ERP package up and running in our company, and all we did was bring more modern technology to bear on supply chain processes that are 40 years out of date.I expected this technology to bring supply chain costs down dramatically, and nothing has changed. My mistake was expecting technology to solve a process challenge." She is now leading the company through a major effort to understand existing processes, identify opportunities to improve them, and adapt the new system to support the re-engineered supply chain processes.
Finally, supply chain leaders resist the urge to surge and are a voice in the company to avoid these disruptive practices. Sluggish sales for most of the quarter are often capped by an end-of-quarter surge.For example, a large manufacturer of consumer products' quarterly demand with many retailers followed a three-month sales pattern of "low, low, high." In a meeting with the CEO, the head of supply chain management pointed out the extreme costs and supply disruptions created by a quarterly cycle consisting of over-capacity and inventory buildup for two months, followed by rush production and delivery in the third month. The CEO doubted that anything could be done about it since it was the "natural demand pattern." The supply chain leader pointed out that the demand pattern was for disposable diapers, and the fluctuations were entirely caused by the CEO pushing the company into the "urge to surge." By accepting and managing to the quarterly sales numbers, the CEO was implicitly signaling to retailers that, when the company was not hitting its quarterly target, it would offer deep price discounts to make the numbers.Thus, retail customers regularly bought a three-month supply in the third month of each quarter so that low "sales" by the company in the first two months of the next quarter would cause another discounted surge.As the CEO put it, "This was a real revelation for me. Babies pee at a constant rate, but our demand was fluctuating wildly. We had trained our retail 'partners' to take advantage of us and only order in the third month of each quarter, when we were trying to make our numbers."
The CEO subsequently drove the supply chain to offer consistent price and delivery terms every month, saving tens of millions of dollars in supply chain costs (consisting of the combined impact of overtime during the surge, downtime and wasted labor during the slow sales months, and higher inventory costs in anticipation of the coming surge). The company shared its savings in supply chain costs with the retail partners, in effect netting them better prices than under the old, high-cost, urge-to-surge supply chain.None of these improvements would have happened without the supply chain leader playing a change-management role with the CEO.
So, what do we look for in supply chain leaders? Supply chain leaders embody five critical skills:hiring the best and brightest, being driven by metrics, having a performance-reward orientation, being technology savvy, and resisting the urge to surge. The question now before you is, "do the leaders of your supply chain strategies exhibit these characteristics?" If the answer is "No," you may face a competitive disadvantage in your supply chains.

Dr. John T. Mentzer is the Distinguished Professor of Business Department of Marketing and Logistics. He holds the Bruce Chair of Excellence and is the Executive Director of the Integrated Value Chain Forums. www.bus.utk.edu/ivc For over 50 years, University of Tennessee (UT) faculty have played a major role in the supply chain/logistics arena -- conducting innovative research, publishing leading-edge findings, writing industry-standard textbooks, and creating benchmarks for successful corporate supply chain management. Programming is top-ranked in Supply Chain Management Review, U.S. News & World Report, and Journal of Business Logistics. Certification is available. http://SupplyChain.utk.edu

Korn/Ferry International Establishes Global Supply Chain Center of Expertise in Shanghai, China

Korn/Ferry International (NYSE:KFY), a premier global provider of talent management solutions, today announced that it is creating a new Global Supply Chain Center of Expertise (COE) based in Shanghai, China. The establishment of the COE is in direct response to the complex challenges posed as Asia in general and China in particular have become the focal points of global supply chain expansion for companies across virtually all industries. Mr. Bill Fello has been appointed to lead this dedicated practice, which will focus on Integrated Supply Chain Management, and will advise clients on a range of pressing leadership issues as they look to enhance their competitiveness worldwide.
"Since founding the first supply chain management practice at this level of executive recruitment, Bill has placed more senior supply chain executives than any other search consultant in the world and is well-known for his excellence in client service," said Mr. Charles Tseng, president, Korn/Ferry International Asia Pacific. "In a fluid global environment with numerous risks, supply chain leaders must be able to keep up with rapid and frequent change and increasing complexity. Proven supply chain talent is in great demand worldwide, especially in China and throughout Asia. There is a shortage of leaders who are experienced in overseeing integrated supply chain efforts for multiple units across multiple geographies who also can keep up with and drive the changes needed for sustainable growth. Bill's expertise and his leadership of the new global COE will be instrumental in enabling clients to fill the gap. With Bill's move to Shanghai, Korn/Ferry is now the only major executive recruitment firm to have its supply chain leader based in Asia."
About the Supply Chain COE
As Managing Director of the new Supply Chain COE, Mr. Fello will direct all of Korn/Ferry's activities relating to filling critical supply chain functional leadership roles in Demand Planning, Sourcing/Procurement, Manufacturing (including Third-Party), Distribution/Logistics, Quality, and Customer Service in the Industrial, Consumer/Retail, Technology, Life Sciences, and Healthcare sectors worldwide. The COE will also support general management talent acquisition needs globally for vertical market supply chain services companies, including Transportation, Third-Party Logistics (3PL's), and Port Authorities. The COE will partner with clients to attract proven supply chain executives who can deliver Best Practices, implement contemporary supply chain processes and achieve a competitive advantage anywhere in the world.

Where will the latest business cycle take freight forwarders?

The business cycle is one of the certainties of the world's economy. It comes in a number of forms but everyone is subject to it. The logistics sector is particularly prone to cyclicality. Indeed, the success of big providers of air and sea freight transport is defined by the dynamics of their cycle.
In air freight, but even more so in sea freight, the business cycle is defined both by variations in demand, which is driven by the wider economy, and a characteristic pattern of supply. Aircraft and vessel owners find the economics of market share irresistible and have an apparent addiction to buying too many aircraft and ships in periods of market growth, only to find they have excess capacity in a downturn. That condition is amplified by the lead time of buying and building aircraft and ships. The success of, say, a shipping company is therefore defined by its ability to manage through the whole cycle, not just the good times.
So the dynamics of both air and sea freight usually follow a predictable pattern, what might tendentiously be called 'boom and bust'. But are all logistics businesses like that? Surely those that buy and sell air and sea freight capacity should be driven by the same imperatives? The answer is an emphatic 'no'.
Over the past decade, the companies still, rather anachronistically, called freight forwarders have tightened their grip on air and sea freight. The biggest operators in that sector such as DHL, Panalpina, Kuehne + Nagel and Schenker have not only gained market share but have also tilted the balance of power between them and the companies whose services they buy. That can be measured by the quantity of freight moved by major forwarders compared with the rest of the market. The most high-profile example in that context is Kuehne + Nagel, which has been expanding its market share, with its sea freight forwarding business growing at 15% per annum in 2007 whilst underlying volume growth market growth has been around 10%.
There is, however, a dichotomy between profits and volume, but one not connected in a linear fashion to the air and sea freight cycle. The key is the cost base of freight forwarders. That is driven by the rates of the shipping and airline companies. Of course in periods of growing demand, those rates will climb. In a period of falling demand, amplified by over-capacity, rates fall. The effect on the bottom line of freight forwarders is therefore perverse. In a period of falling demand, forwarders will often see increased profits. In a period of increasing demand, lower profits. That is the theory. Can that be seen in present performance?

(From Figure) DHL Forwarding presents an equivocal picture. Its profitability, in EBITA terms, has fluctuated as revenue has consistently grown over the past few years. However, there are too many exceptional items, such as the demerger of contract logistics, to extrapolate any firm conclusion. Panalpina has had a very different dynamic, with profitability consistently climbing after a low of 2.5% EBITDA in 2005. Volume has also been consistently climbing. Different again is the record of K+N, which has had consistently climbing EBITA and revenue. It has a more stable record, with both volumes and profits increasing steadily over the decade.
What has dominated the picture of big forwarders' performance has been the consistent growth of volumes in air and sea traffic, particularly between China and the US and Europe. That has combined with an increased profitability of those forwarders. Thus, secular developments have obscured the cyclical characteristics.
So what does this augur as far as immediate prospects where freight forwarders are concerned? One possible outcome is that the past secular trend could reverse. Cargo volumes out of China could fall so much that lower freight rates would not compensate. Freight forwarders' profits would drop heavily. That 'race to the bottom' scenario might seem a little pessimistic and would assume large falls in consumer demand for Chinese products in the west.
A more moderate proposition would see flatter dynamics in the air and sea freight markets. With airlines aggressively cutting back belly freight and some rationalisation of capacity by container shipping companies, the global logistics industry would see freight forwarders in a weaker position to negotiate lower rates. In essence, the perception of the market by the providers of physical capacity – aircraft and ships − would turn 'bearish'. That is already being seen in the aviation market, with large airlines redeploying aircraft and smaller airlines going out of business. It has yet to happen in container shipping and although slower vessel speeds must have some affect, that is a long away from the decommissioning required.
The present state of the global logistics market suggests, therefore, that over the next 12-24 months there may be a weakening of the position of freight forwarders in the air freight market on the back of lower volumes and lower available capacity. Here the number to watch is 'Available Tonne-per-Kilometres' (ATKs). In container shipping, the atmospherics still seem more optimistic with shipping lines more concerned by the effect of fuel costs than the shortage of trade. That suggests that if volumes do drop, the forwarders will be able to strengthen their position despite any falls in freight shipped as the shipping companies will not be able to get rid of capacity fast enough.
In summary, then, the prospects of the big forwarders have become more uncertain. Over the past 10 years they have experienced a period of stability and growth which has underpinned strong profits. That phase is likely to be over, yet will they enter a period of low growth, falling shipping rates and for them, strong profits? Will forwarders be able to 'buck' the business cycle and retain their market position?

Climate Change and Supply Chain Management

Global executives increasingly identify the environment, including climate change, as
a top concern. When it comes to purchasing, however, it appears that companies
aren’t necessarily translating the importance they place on climate change into
action. A McKinsey survey of more than 2,000 global executives1 f inds that while
nearly half of respondents say that climate change is a somewhat or very important
issue to consider in purchasing and supply chain management, fewer than
one-quarter report their companies always or frequently take climate change into
consideration in these areas. Among high-tech and other manufacturing executives,
54 percent and 56 percent of respondents, respectively, say climate change is
important in purchasing, yet these executives were no more likely than average to say
it was considered in practice.
They may be missing an opportunity. Our analysis suggests that for consumer
goods makers, high-tech players, and other manufacturers, between 40 and 60
percent of a company’s carbon footprint resides upstream in its supply chain—from
raw materials, transport, and packaging to the energy consumed in manufacturing
processes. For retailers, the figure can be 80 percent. Therefore, any significant
carbon-abatement activities will require collaboration with supply chain partners,
first to comprehensively understand the emissions associated with products, and
then to analyze abatement opportunities systematically. Surprisingly perhaps, we
find that many of the opportunities to reduce emissions carry no net life-cycle
costs—the upfront investment more than pays for itself through lower energy or
material usage. Others, however, will require tradeoffs between emissions and
profitability, in areas such as logistics and product design (including product
specification and functionality). Forward-looking companies are using such
discussions as opportunities for supplier development, for example by transferring
best practices in manufacturing, purchasing, and R&D—as well as energy
efficiency—to key suppliers. This opens the possibility of still lower costs and
improved operational performance, in addition to helping suppliers remove more
carbon from their supply chains.

Industry Focus: 2008 Predictions for Transportation & Logistics

The domestic U.S. transportation industry has been weathering rising fuel costs and a decline in shipper activity as the country's economy has slowed toward, or tipped into, recession. But the American Trucking Associations' For-Hire Truck Tonnage Index, as reported at the end of February, showed a tick up of 2.4 percent in January, after a modest 1.5 percent increase in December.
Trucking comprises almost 70 percent of tonnage hauled on all domestic freight transportation modes, according to the ATA, which points to truck tonnage as a reliable barometer of the overall U.S. economy. But ATA Chief Economist Bob Costello notes that truck tonnage often leads both recessions and recoveries, and in some cases the tonnage indicator has even rebounded before the overall economy actually started a recession.
"I anticipate that truck tonnage will recover before the general economy, but I am withholding judgment on whether truck tonnage is in a recovery mode until I analyze another month or two of data," Costello said in the ATA statement on the January tonnage report.
3PL Growth Seen
Meanwhile, the broader third-party logistics (3PL) market continues to see expansion, although the cooling economy has slowed the segment's growth rate, according to the latest "Trends in 3PL/Customer Relationships" report from industry analyst firm Armstrong & Associates. Armstrong uses its proprietary database of 3,334 3PL customer relationships to identify the top outsourcers to 3PLs, service demand and market size by industry segment.
"We haven't finalized the numbers, but we anticipate that in 2007 we'll have seen about 7-7.8 percent growth in the U.S. third-party logistics market," says Evan Armstrong, president of Armstrong & Associates. "And in 2008 we anticipate the market will grow 7.5 percent." That compares to an average annual growth rate of just over 13 percent from 1996 to 2006, according to Armstrong, who says that the trend has been for the 3PL market to grow at about four times the rate for the overall economy.
While the "trucking recession" has prompted many service providers in that industry to ease rates down to maintain or add shipper customers, Armstrong does not expect a similar dynamic of dropping prices in the 3PL space. "If you're a company that is just outsourcing logistics and warehousing to a 3PL, then you'll see savings through the outsourcing, but if you've already outsourced those functions and are trying to renegotiate, I don't think you're going to see a significant level of savings," he says.
The Move to Strategic
The market will continue to challenge third-party logistics companies to offer broader coverage in terms of the depth and breadth their range of services. To date, surprisingly, the ongoing use of 3PLs has been tilted toward the tactical rather than the strategic, according to Armstrong & Associates' figures. "Only a small number of the relationships [between 3PLs and their customers], roughly 20 percent, are strategic," Armstrong says. "The rest are tactical." An example of a tactical relationship would be a retailer using a 3PL for regional warehousing, versus a more strategic relationship that might see the 3PL managing inbound and outbound transportation in addition to running warehousing.
Still, as companies look to focus on their own core competencies, they will continue to seek out 3PLs that can assume a larger role in their supply chains and become strategic partners rather than simply tactical service providers. This is prompting 3PLs to grow both organically and through acquisition. One example is ATC Logistics & Electronics, which has grown over the past five years from being primarily a captive 3PL for AT&T Wireless to now serving more than a dozen contract customers with outbound order fulfillment and a host of reverse logistics services.
Geographic expansion also is vital, as customers look to their 3PLs to manage ever-more-global supply chains. Last year, for example, Menlo Worldwide, the logistics subsidiary of Con-way, acquired Chic Logistics, an established provider of domestic third-party logistics and transportation management services in the People's Republic of China, with a vision to create a "'first-mile' logistics in China through 'last-mile' delivery in North America" solution for customers running global supply chains. "Being in the right global markets is very, very important [for 3PLs] these days," Armstrong notes.
M&A Strong in '07
These assorted market trends have driven mergers and acquisitions activity within the global transportation and logistics sector to record highs over the past two years, according to "Intersections," PricewaterhouseCoopers' quality report on M&A activity in the industry. Total deal volume reached a 20-year high with 1,291 deals in 2007, up from the record number reached in 2006. However, total deal value fell in 2007 to $83 billion, down from the two-decade high of $164 billion reached the year before. The report's figures include numbers for the passenger air and passenger ground segments, which can account for significant M&A volume. But shipping, trucking and logistics (as well as cargo air and mixed mode) continue to account for well over half of the mergers and acquisitions activity.
Analyzing the current report's numbers against past figures, Kenneth H. Evans, Jr., U.S. transportation and logistics sector leader at PricewaterhouseCoopers, points out that while shipping has historically been a cyclical industry, the M&A cycle has remained fairly close to peak levels for the better part of three years. "Whenever there is a lot of value being created in companies as there has been in shipping, it just attracts very significant outside investment," Evans says. "It's also generating a lot of cash in the hands of shipping companies to pursue strategic acquisitions."
Will the prospect of a downturn in the U.S. economy put potential M&A deals on the back burner in 2008? Not necessarily, according to PricewaterhouseCoopers. Evans says that, in looking at historical M&A activity stretching back two decades, he and his colleagues typically saw somewhat of a drop in activity as the U.S. economy was entering or passing through recession. But even with all the anxiety about the economy's direction in 2007, the pace continued unabated last year. "What's going to be interesting is to see whether the first quarter of 2008 shows sustainable activity coming up to the level of the last quarter of 2007," adds Emeric Deramaux, manager for transaction services with PricewaterhouseCoopers and a collaborator on the "Intersections" report, "because the market was expecting, and we were expecting, a decrease in at least the financial investors' activity, but it simply has not happened." The Q1 figures, Deramaux says, should shed some light on whether 2008 will see continued growth or somewhat of a slowdown. Stay tuned...

The logistics world in 2008!

The fate of the worldwide transport and logistics industry in 2008 will be inextricably linked to the state of the global economy. This makes any sort of prediction very difficult as economists themselves are divided on the outlook. However, most are agreed that industry faces a slowdown; it is the extent to which this will occur that is still uncertain.

The roots of the slowdown lie in the so-called 'credit crunch' in global financial markets, which was triggered by defaults in the 'sub-prime' mortgage sector in the US. The effects of this have yet to unravel – hence widespread uncertainty. In many respects, fear of the unknown is likely to result in a self-fulfilling prophesy. Consumers will reduce their expenditure and manufacturers will put off investment decisions, creating a recession built on lack of confidence. Shipping volumes are bound to be impacted.

In addition to the 'credit crunch', spiralling fuel costs have fanned inflation, leading to rising interest rates worldwide. Many logistics providers have felt the full force of these rises, being unable to pass them on in their entirety and suffering a consequent impact on margins.
If a slowdown is inevitable as economists think, the question remains as to its extent. A recession in the US, the world's largest economy, will of course impact on transpacific volumes. This has already been experienced in the container shipping sector. Maersk Line is reducing its workforce by 2-3,000 jobs (although this is partly the result of internal problems); the president of Japanese global operator Mitsui OSK Lines (MOL), Akimitsu Asida, has said that 2008 "losses on the North America route will be significant"; and NYK has outlined a plan to reduce ship speeds by 10% in order to cut fuel costs. Meanwhile, recent and continuing investment in new capacity by shipping lines has made any slowdown in volume growth all the more critical.

A recession is also likely to badly hit air cargo markets. Traditionally cyclical high-value goods, such as electronics, are amongst the first to see cutbacks in demand. Shippers may decide to migrate some lower value volumes to sea, or within the US from air to road, as traditionally occurs in a weak market.

If a slowdown occurs, 2008 will be characterised by increasing freight capacity and volumes failing to keep pace – certainly in the shipping sector. Freight forwarders will be the major beneficiaries as this scenario would enable them to take a bigger slice of buy-sell revenue. With capacity in some air freight markets also running high, a steep drop in rates in this sector could also be on the cards – which would be further bad news for carriers which have been battling a steady decline in overall yields for some years.

However, there is a chance – even a good chance – that all this talk of global recession is overblown. The Asia Pacific region may well continue its strong growth, with China very much less reliant on the US market than it once was. China's own domestic economy will continue to suck in goods from its neighbours – especially Japan – and those countries will in turn grow in significance as export markets. Likewise, Europe has yet to show any real signs that it has caught the US economic cold, despite slightly wobbly retail figures over Christmas.

It has been said that more efficient supply chains, coupled with more flexible job markets, have made the chances of worldwide recession far less likely than in the past. Economies are now much better able to compensate for the type of financial and commodity pressures that have been seen in the past year. This will hopefully mean that any slowdown experienced in the global economy is far less serious than many analysts currently fear.

Will 2007 prove to be the lull before the storm?

In economic terms, 2007 will be remembered for a shift from a China-fuelled boom to a property-focussed bust. The present crisis in the global banking and credit system is so acute that some more cautious commentators are already describing it as a "blow to the Anglo-Saxon economic model".

Behind the scenes, one of the underlying trends is an 'unwinding' of trading patterns that have been established for several decades. The worrying thing for those in the logistics industry is that such developments are almost certain to affect them during 2008.

The past year has marked a zenith in the boom for logistics services. Freight forwarders, in particular, have seen continued double digit growth during 2007. That trend has been largely fuelled by the demand for container shipping out of China into the US and Europe.

The prosperity in the freight forwarding sector, which has been apparent for over a decade, has both attracted new players into the market such as Geodis and CEVA and underpinned the growth of established major players like Kuehne + Nagel into other segments of logistics.
Contract logistics has continued to perform in a modest way but that market is cautious, emphasising the complexity of the market for outsourcing.

German companies have remained high profile throughout 2007. Deutsche Post World Net has had a quiet crisis in its strategic direction, with the appointment of John Allan as chief financial officer indicating a shift away from 'size at any cost'. Meanwhile, the other German logistics giant, Deutsche Bahn, is stuck in a tunnel of the politicians making, with its privatisation stalled, at least for the moment.

The same forces that have stalled Deutsche Bahn's private sector ambitions have also skewered mail deregulation in Europe. Rail may also be suffering from similar resistance to the consequences of open markets in Europe despite a healthy number of private sector entrants hoping to exploit the potential of that mode – a potential well demonstrated in the US where rail has attracted long-term investment on the back of the promise of sustained high growth in container and energy sector traffic.

Volumes in the container shipping sector have also remained strong but as is so often the case the shipping companies have responded with the purchase of huge new capacity. Maersk, in particular, has suffered badly from its failure to properly manage expansion, illustrating that as in so many transport markets it is remarkably difficult to profit from market dominance.
Air freight is another sector where over-capacity is a traditional weakness. However, in 2007, many airlines could not indulge in their usual habits of creating too much capacity due to so many of them emerging from Chapter 11. This is already set to change in 2008.

Road freight in the US was hit by lower volumes in 2007 as that sector felt the effects of a major downturn. In Europe, growth rates remained flat, with even the biggest network road freight companies returning meagre figures. However, the market for acquisitions in Europe was strong with the UK and Germany seeing big purchases by DPWN, K+N and Norbert Dentressangle.
One sector for which 2007 turned out to be a great year was container ports, which saw their value shoot through the roof as financial investors realised the potential of those businesses for stable yet strong returns.

This year also saw the return of oil prices as a major cost pressure for the logistics industry as a whole. Yet so far it has appeared not to be a constraint on economic activity, in part because many transport providers have increased productivity and improved their fuel efficiency. Higher oil prices have, however, depressed profits in a fewer weaker markets.
In summary, 2007 was a quite good year for the logistics industry despite slower US growth. Volumes remained strong and many logistics providers were able to pass higher costs on to customers. What might be suggested with some degree of confidence is that 2008 will be worse.

Source: Transport Intelligence.